Supporting smaller businesses in trade to drive the ESG agenda
Sustainability is fast-becoming a priority for business and society, and while it may be top of mind, weaving in more sustainable ways of working and living is not realistic for many, including smaller businesses in trade that are struggling to access finance, writes the TradeSun team in the final blog of this three-part sustainability series.
Policymakers around the world are carving out rules for a sustainable future, but how smart and effective new regulations popping up across trade are remains dubious. Simply, not enough is being done to drive real change, particularly in the SME economy, which will be crucial for an inclusive and sustainable world.
A one-size-fits-all approach will not make trade finance more sustainable. There are too many nuances and complexities with supply chains stretching the world over – and that is why it is taking the industry longer than other sectors to advance in several key areas, including environmental, social and governance (ESG), as well as digitization.
The growing urgency around sustainability, particularly climate change, has triggered authorities around the world to enact “green” initiatives. At climate summit Cop26 last year, world leaders pledged to create net-zero shipping corridors, as well as promising to halt deforestation. More recently, the European Council gave export credit agencies in the EU until the end of 2023 to set deadlines for ending support for fossil fuels.
The SME economy
The private sector is responding with innovation to high-level initiatives, as well as investor and public pressure over sustainability. Banks are rolling out sustainable solutions for trade and working capital to incentivize their corporate clients to be more ESG-friendly. While such top-down initiatives can steer change among larger corporates, their impact has not yet filtered down to smaller companies.
Smaller companies often struggle to access trade finance owing to cumbersome and costly Know Your Customer (KYC) processes, onboarding difficulties, among other factors. The SME economy represents about 90% of businesses and more than 50% of employment worldwide, but the trade finance gap – which largely affects SMEs – remains stubbornly “bigger than ever”, states the Asian Development Bank in a report last year. The bank estimates unmet trade financing demand is $1.7 trillion, up from $1.5 trillion in 2018.
SMEs typically do not measure their ESG impact, often lacking the resources to do so. Yet they account for a large chunk of global business emissions, which is why they must have access to sustainable financing tools to enable real change for trade, as well as drive socio-economic prosperity locally, regionally, and globally.
Sustainable… progress?
Financial institutions are using general frameworks, such as the Sustainable Development Goals and the Loan Market Association’s Social Loan Principles, in their ESG-friendly trade products. While this can only be seen as a positive development, trade-specific standards are needed to capture trade’s complexities.
Additionally, exactly how ESG factors are measured in trade also proves a sticking point. Technology is being used to better quantify sustainable factors in transactions, with artificial intelligence deployed by banks to analyze transaction data against sustainability frameworks and data aggregators. This offers robust and accurate reporting for banks and their clients, which will be critical in increasing transparency across transactions, avoiding accusations of “greenwashing”, and contributing to real change across entire supply chains.
Meanwhile, in an effort to create sustainable standards for trade, the International Chamber of Commerce is devising a roadmap for sustainable trade finance that rates the different elements of a transaction in terms of economic, social, and environmental impact. It brings together multiple frameworks in one channel, and is aimed at businesses, banks, and regulators. This is highly commendable, though it’s unclear if there will be widespread adoption of the initiative.
The SME economy needs more support in its sustainable transition. Smaller companies are already cash-strapped and often unable to access trade finance – without accessible incentives, it is not realistic for this key group to advance the ESG agenda. Policymakers must create “smart” policies that promote a more inclusive economy across the business landscape, in tandem with private sector efforts and innovative technologies, to drive real change.
More from this series:
Sustainability series: Matching up the E, S and G in the complex world of trade
Sustainable finance is gaining ground – but global trade needs more detail
